US Economy In A “Gut Wrenching” Slump

US Economy In A “Gut Wrenching” Slump

$DIA, $SPY, $QQQ, $VXX

Albert Edwards, the Société Générale strategist who forecasts the S&P 500 will dive 75% from last year’s record high, also says a shrinking economy cannot be avoided because companies are cutting back on spending as their profits get squeezed by higher labor costs.

“Newly released US whole economy profits data show a gut-wrenching slump,” he said in an 7 April  report to clients of the Paris-based bank. “Whole economy profits never normally fall this deeply without a recession unfolding.”

National income accounts data provide a picture of the profitability for the whole economy, including companies that are not publicly traded.  Mr. Edwards is most alarmed at how quickly profits are shrinking in the US.

“Whole economy profits tend to be a leading indicator of the business investment cycle,” he said. “Historically, all recessions are effectively caused by slumps in business investment driven by a profits downturn.”

Even more worrisome is his prediction of widespread defaults among corporations that binged on debt as the US Fed in Y 2008 cut borrowing costs to record lows.

The central bank slashed interest rates to help the US economy recover from the worst contraction since the Great Depression. Making payments on that debt is more difficult for companies with shrinking profits or losses like shale Oil based energy producers are experiencing.

“If I had to pick one asset class to avoid it would be US corporate bonds, for which sky-high default rates will shock investors,” Mr. Edwards said. “The economy will surely be swept away by a tidal wave of corporate default.”

Edwards’ prediction of a recession follows one by front running GOP Presidential candidate Donal Trump.

Mr. Trump said this week that high unemployment and an expensive stock market have set the stage for an economic decline.

“I think we’re sitting on an economic bubble. A financial bubble,” Mr. Trump said.

Friday, the US major stock market indexes finished at: DJIA +35.00 at 17576.96, NAS Comp +2.32 at 4850.69, S&P 500+5.69 at 2047.68

Volume: Trade was lighter than average with about 820-M/shares exchanged on the NYSE.

• Russell 2000 -3.5% YTD
• NAS Comp -3.1% YTD
• S&P 500 +0.1% YTD
• DJIA +0.9% YTD

Have a terrific weekend.

Paul Ebeling

HeffX-LTN

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